The Keynes Solution: The Path to Global Economic Prosperity [Hardcover]

On offer in this book is a clear blueprint for a progressive set of economic policies to restore global prosperity and help build a better, fairer world.

To compare with two other recent and excellent books relating to Keynes, it lacks the gravitas of Skidelskys 'Keynes: Return of the Master' or the elegance of Peter Clarkes 'Keynes'. But its my pick of the bunch due to its lucidity, strength of argument and wholehearted grappling with all the key elements of our macro economic problems.

Like many other books released in the wake of the global crises, you have a potted history of Keynes original refutation of classical economics and how general prosperity improved once polices in line with his recommendations were adopted; the come back of neo-classical economics which had largely displaced Keynesianism by the late 70s; and how the latest versions of classical economics like efficient market theory are in part responsible for the 2007-2009 crises. I found the particular historical incidents Davidson picks out especially compelling; he presents the strongest and clearest case for a Keynesian response I've encountered.

The book goes further than most, in that it outlines a whole package of Keynesian policies to take us to prosperity, rather than just focussing on the need for sustained government stimulus until the private sector's confidence and level of demand has recovered sufficiently to ensure a decent level of employment on its own. Davidson offers a fair minded Keynesian way to check the tendency of labour to become unruly and demand excess wages in conditions of full employment. There are specifics on how to reform financial regulations (though these are targeted specifically for the US). Theres a section on international trade and on Keynesian reform for the international monetary system.

I dont exspect this book will directly change many minds, unless its read by those few who are genuinely flexible and open to changing their views. There is no attempt to meet halfway those who's opinion is governed by an instinctual grasp of "soundness" rather than theoretical considerations. To them, the very strength of the arguments may come across as desperate. Especially, as one of the few flaws in this book is that the author sometimes repeats quite simple ideas after only a few sentences. While some attention is paid to global concerns, the book is rather US centric. The presentation and editing is fair to good, but not excellent.

This book will be great for those already of a progressive opinion who would like a well ordered set of compelling arguments to use in their debates, whether they are academic or practically orientated such as the countless meetings to re-architect the worlds financial infrastructure that are currently going on. And unlike many other books of similar quality, the writings easily clear and accessible enough for the interested general reader.

I found this book to be concise and convincing. It would be hard to find a fault with it. It is too easy to associate Keynes with only tax and spend policies, but this book effectively highlights the other areas of economics Keynes stressed, many of which have proved very relevant to recent events.

The first of these areas Keynes emphasised was the "neutral money axiom"/ liquidity preference. The argument is that free market economists fail to understand how people can choose to hold liquid money as a reaction to uncertainty, instead of investing which would be the rational free market assumption.

Secondly I found the discussion of the whole area of "market makers" very interesting and new to me. In my own personal free market type ignorance, I have never before appreciated exactly how financial markets benefit from liquidity and how this liquidity is not inherent, but has to be generated by organisations pro-actively willing to buy when the herd is selling, and sell when the herd is buying. The desirability of market makers and the liquidity they bring highlight another angle from which to observe the weakness and folly of many of the new hybrid financial products which played their toxic role in the recent troubles. Many of these new securitised investment products were sold as being very stable and very liquid. When the troubles came to these markets, many investors quickly learnt otherwise.

Thirdly the "ergodic axiom" (calculating future probabilities based on past data). More broadly this is the fallacy of confusing probabilistic risk which can be pooled, managed and tamed, with uncertainty which should be treated with more caution. From this book it is easy to assume Keynes would have also seen the inherent dangers of complex finacial products and practises, and the idiocy of institutions believing they had quantified the risks they were exposed to, when it was really unquantifiable uncertainty, which we are now all paying for. Keynes would also have recognised the delusional self congratulation of organisations employing ex-rocket scientists to design and manage their exposure to financial risk, when they really did not have a clue as to what was around the corner.

Also I thought I had little more to hear regarding critiques of free trade policies, but Davidson managed to include a few more gems. For example he explains in accessible language that the full benefits of comparative advantage assumes full employment in both countries in order for their to be reciprocating exports and imports, and also the theory assumes that the extra goods generated automatically are demanded and do not cause excess capacity.

But on a cautious note, much is made in this book and by other left orientated economists about the WWII spending of the US finally ending the last great depression. But consider America's position after WWII, finding itself one of the few undamaged industrialised countries remaining. Most of its old competition in Europe had reduced its capacity for manufacturing consumer goods, and Japan was in poor shape also. Of course America was going to enjoy a prosperous decade, its industrial capacity was experiencing high demand and scarce supply. Presently with an industrialising China and India, can America really have the same confidence that it can pay off a large Keynesian government debt over the next few decades? I would rather be 1950's America with any amount of debt, than today's America suffering from out-sourcing and off-shoring.

Also the proposition Davidson makes regarding not importing from countries with lower child labour / environmental / health and safety standards sounds simple enough, but it would open the way for endless complexity and subjective gaming by domestic interests. I advocate protectionism more strongly than anyone, but would be wary of a subjective basis for it such as described in this book.

A big strength of this book is that it identifies the correct target head on regarding America's problems: being the trade deficit with China and co, and the loss of jobs resulting. Davidson proposes a clearing house kind of international exchange system which would put the onus on creditor (export surplus) countries to reciprocate their stored up demand (export earnings), instead of saving it as presently is happening too much. A central part of Keynesian analysis was the way savings reduce aggregate demand, and on an international scale, this is now the issue. This question of China not importing as much as it exports is THE biggest question in world economics presently, and Davidson must be commended for proposing a plan which squarely tackles this issue. I am not able to fully comprehend or judge how good a plan it is, but I greatly respect the fact that he has one. Excellent read.